SARPD Oil International Ltd v Addax Energy SA & Anor [2016] EWCA Civ 120

Case No A3/2015/2927[2016] EWCA Civ 120
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
QUEEN’S BENCH DIVISION
COMMERCIAL COURT
THE HONOURABLE MR JUSTICE ANDREW SMITH
2014-1019
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 03/03/2016
Before
THE RIGHT HONOURABLE LORD JUSTICE LONGMORETHE RIGHT HONOURABLE LORD JUSTICE SALESTHE HONOURABLE MR JUSTICE BAKER
Between
SARPD OIL INTERNATIONAL LIMITEDClaimant/ADDAX ENERGY SA & ANRDefendant/Appellant
Mr David Lewis QC & Mr Oliver Caplin (instructed by Hill Dickinson LLP) for AppellantMr Michael Nolan QC (instructed by Holman Fenwick Willan Switzerland LLP) for RespondentsHearing Hearing dates: 11 th February 2016
JudgmentLord Justice Sales delivering the judgment of the court:Introduction
[1]This is an appeal about security for costs in a comparatively ordinary international purchase contract case proceeding in the Commercial Court. The subject of the purchase and sale was a quantity of gas oil and there is a short string of 3 parties.[2]Rule 25 of the Civil Procedure Rules deals with, among other things, security for costs on an application by a defendant to civil proceedings. CPR Part 25.12 provides that “a defendant may apply for security for his costs” of proceedings and CPR Part 25.13 then sets out conditions to be satisfied on such applications:- “1) the court may make an order for security for costs under rule 25.12 if – a) it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and i) One or more of the conditions in paragraph (2) apples, or ii) An enactment permits the court to require security for costs. 2) The conditions are :- a) the claimant is:- i) resident out of the jurisdiction; but ii) not resident in a Brussels Contracting State, a State bound by the Lugano Convention, a State bound by the 2005 Hague Convention or a Regulation State, as defined in section 1(3) of the Civil Jurisdiction and Judgments Act 1982; … c) the claimant is a company or other body (whether incorporated inside or outside Great Britain) and there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so; d) the claimant has changed his address since the claim was commenced with a view to evading the consequences of the litigation; e) the claimant failed to give his address in the claim form, or gave an incorrect address in that form; f) the claimant is acting as a nominal claimant, other than as a representative claimant under Part 19, and there is reason to believe that he will be unable to pay the defendant’s costs if ordered to do so; g) the claimant has taken steps in relation to his assets that would make it difficult to enforce an order for costs against him.” Rule 25.13.2(c) is the rule at the centre of the dispute. a) it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and i) One or more of the conditions in paragraph (2) apples, or ii) An enactment permits the court to require security for costs. a) the claimant is:- i) resident out of the jurisdiction; but ii) not resident in a Brussels Contracting State, a State bound by the Lugano Convention, a State bound by the 2005 Hague Convention or a Regulation State, as defined in section 1(3) of the Civil Jurisdiction and Judgments Act 1982; … c) the claimant is a company or other body (whether incorporated inside or outside Great Britain) and there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so; d) the claimant has changed his address since the claim was commenced with a view to evading the consequences of the litigation; e) the claimant failed to give his address in the claim form, or gave an incorrect address in that form; f) the claimant is acting as a nominal claimant, other than as a representative claimant under Part 19, and there is reason to believe that he will be unable to pay the defendant’s costs if ordered to do so; g) the claimant has taken steps in relation to his assets that would make it difficult to enforce an order for costs against him.”

The facts

[3]The claimant (“Sarpd”), a company incorporated in the British Virgin Islands (“BVI”), bought a quantity of gas oil from the defendant (“Addax”), a company incorporated in Switzerland. Sarpd alleges that the gas oil did not meet the contractual specification and claims damages or an indemnity from Addax. There is a dispute about the exact terms of the contract but Addax denies that the oil did not meet the terms of the specification and says that, in any event, it was agreed that a certificate of quality in respect of samples taken from the mother (rather than the daughter ship) would be final and conclusive of the quality shipped. Addax also says that, if the gas oil did not meet the contractual specification, that is the fault of Glencore Energy UK Ltd (“Glencore”) from whom it bought the oil on essentially back to back terms; it has, therefore, brought Part 20 proceedings against Glencore for damages or an indemnity in respect of Sarpd’s claim.

The applications and the judgment

[4]By an application dated 21st May 2015 Addax sought an order that Sarpd give security for its costs of the proceedings by paying into court £896,161.27 because Sarpd was a company and “there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so”: see CPR 25.13(2)(c). The application was supported by a witness statement of Mr Ralph Hicks of Hill Dickinson LLP, Addax’s solicitors, who explained the basis on which security is sought. The sum should, he says, cover:- 1) costs incurred by Addax in defending the claim. 2) costs incurred by Addax in “passing the claim on to [Glencore], which is a natural and inevitable result of [Sarpd] bringing the claim”. 3) costs incurred by Glencore in defending the part 20 claim. It is said that, insofar as Glencore obtains an order that its costs be paid by Addax, Addax should “be entitled to add the liability for [Glencore’s] costs to its costs which are recoverable from [Sarpd]”, and that the order for security should cover them.[5]Addax relies only on condition (c) in CPR 25.13(2). The evidence about whether the condition is satisfied is limited, because Sarpd has said nothing about its financial position and Addax has access to little information: it does not know whether and, if so, where Sarpd has any assets against which Addax could enforce an order, and no information about Sarpd’s finances is publicly available. Addax’s only information is in a letter of 15th May 2015 from its BVI solicitors, Walkers Global, who say that under the applicable BVI legislation Sarpd would be obliged to keep financial records sufficient to show and explain its transactions and for its financial position at any time to be determined with reasonable accuracy. But the records do not have to be kept in the BVI or made publicly available. The publicly available records at the BVI companies register do not include any accounts or other financial records for Sarpd, and they only show that it was incorporated and registered in 2008, that at some stage it had to be “restored” to the register, that its “status description” is “active” (a status that is not explained in the evidence) and that from time to time it has had a “certificate of good standing” (the significance of which is not explained either).[6]Mr David Lewis QC for Addax submitted to the judge that, despite a number of requests from Hill Dickinson, Sarpd had failed to provide evidence of good financial standing or to put up security. Mr Michael Nolan QC for Sarpd pointed out that, when requesting security, Hill Dickinson did not exactly ask for information about Sarpd’s financial standing, but Andrew Smith J held that Sarpd had been reticent about it, and that reticence was deliberate.[7]The judge held on that state of the evidence that there was no reason to believe that Sarpd would be unable to pay Addax’s costs if ordered to do so. He said that the obvious explanation for Sarpd’s reticence about its financial position was that it would benefit in settlement negotiations from Addax’s doubt about whether it would recover its costs even if it defeated the claim. But that was no reason to suppose that they could not pay the costs if it lost. He added that he suspected it had become the practice of the Commercial Court to order security for costs in circumstances where a company had not filed publicly available accounts, had no discernible assets and declined to reveal its financial position; but, if such practice had developed, it was not justified and he would not follow it. Lewison LJ gave Addax permission to appeal since the appeal raised what he considered to be an important point of practice and had a real prospect of success.[8]The first question for us is whether the judge was justified in not following what he suspected was the practice of the Commercial Court.[9]There are then further questions which arise if security for costs is to be ordered, namely whether the sum for which security is to be given should include, on the basis that Sarpd’s claim fails:- 1) Addax’s own costs of suing Glencore; and 2) the costs which Addax will have to pay Glencore in respect of Glencore’s own costs of defeating the Part 20 proceedings. There is then a further point about the relevance, to the amount of security to be ordered, of the inclusion of already incurred costs in the costs budgets which had been approved by Blair J before the security for costs application.[10]Although the judge did not need to determine these questions he said that, if he had ordered security, he would have included Addax’s costs of suing Glencore but excluded the costs for which it would be liable to Glencore. He would have also adhered to the amounts set out in the costs budget for Addax.

The law

[11]The first question is not free from authority. In Re Unisoft Group Ltd (No. 2) [1993] BCLC 532 Sir Donald Nicholls V-C was considering an application against an English company in respect of which section 726(1) of the Companies Act 1985 empowered the court to order security for costs:- “if it appears by credible testimony that there is reason to believe that the company will be unable to pay the defendant’s costs if successful in his defence.” The question argued was whether the court had to be satisfied on a balance of probabilities that the claimant, if it lost, would be unable to pay the defendant’s costs. Sir Donald pointed out that the relevant phrase was “will be unable” not “may be unable”. He nevertheless held that the court merely has to have “reason to believe” that the company will be unable to pay so that there could be no basis for saying that the court had to be satisfied on a balance of probabilities that the claimant would not be able to pay.[12]In Jirehouse Capital v Beller [2009] 1 WLR 751 it was argued that Sir Donald had not in fact rejected the “balance of probabilities” as a test. But this court did not agree. Arden LJ (with whom Moore-Bick and Mummery LJJ agreed) said:- “I do not accept the argument … that the test of “reason to believe” must be elevated to a test of balance of probabilities simply because the matter to which the test relates is something which, as Sir Donald Nicholls V-C held, must be established and not simply identified as a possibility. That which has to be established is something that will occur only after the order for security is made. It can therefore only be a matter of evaluation. A person can have a reason to believe that a future event will occur.”[13]It follows that it is not sufficient for the court or the defendant to be left in doubt about a claimant’s ability to pay the defendant’s costs if the claimant loses. Nor is it sufficient as the first instance judge in Jirehouse had done to paraphrase the wording of the rule by saying that there was a significant danger that the claimants would not be able to pay such costs. The court must simply have reason to believe that the claimant will not be able to pay them.[14]That is, as Arden LJ said, a matter of evaluation; it is well recognised that in such cases this court should only interfere if the judge has applied some wrong principle, has failed to take a relevant matter into account, has taken an irrelevant matter into account or is plainly wrong, see Assicurazioni Generali SpA v Arab Insurance Group [2003] 1 WLR 577, paras 16-17 per Clarke LJ, approved by Lord Mance in Datec Electronics Holdings Ltd v UPS Ltd [2007] 1 WLR 1325, para 46.

Submissions

[15]Addax contended that security for costs should normally be ordered if a company had no publicly available accounts, had no discernible assets and refused to say anything about its financial position. It relied on the overriding objective of the CPR being to deal with case justly and the parties’ duty to co-operate to that end (CPR 1.1 and 1.3). It said further that the judge was right to say that, if he had awarded security, he would have included Addax’s costs of suing Glencore and it was inconsistent to refuse to add Addax’s costs for which it would be liable to Glencore since those costs, once ordered by the court to be paid, would be the costs of Addax and thus within CPR Part 25.12. It would also be right for no departure to be made from the figure in the costs budget which had previously been approved by Blair J.[16]Sarpd contended that the judge’s evaluation of the evidence was correct since the evidence furnished no reason to believe it would not be able to pay Addax’s costs if Addax won. The duty to co-operate with the defendant to enable the court to deal with cases justly did not extend to filling evidential gaps when the burden of proof was on the defendant. The costs of Glencore for which Addax might become liable if the claim failed were not the costs of Addax nor, indeed, were Addax’s costs of suing Glencore. The approval of Blair J to the costs budgets could not extend to costs already incurred which, for the purposes of applications for security for costs, should therefore continue to be subject to the ordinary depreciation which a defendant’s bill of costs would have been before the rule about costs budgeting had started to operate. “Reason to believe … unable to pay”[17]We consider, with all due respect to the judge, that he was plainly wrong. If a company is given every opportunity to show that it can pay a defendant’s costs and deliberately refuses to do so there is, in our view, every reason to believe that, if and when it is required to pay a defendant’s costs, it will be unable to do so. The judge said that the obvious explanation of the refusal was that Sarpd wanted, for the purposes of settlement negotiations, to leave Addax in doubt about whether it would recover its costs, even if it defeated the claim. But the thinking behind that is that it is permissible for Sarpd to give Addax reason to believe it will be unable to recover it costs but at the same time assert that there is no reason for the court so to believe. That is illogical and unacceptable.[18]Mr Nolan’s alternative explanation in oral argument was that Sarpd might just want to keep its financial position confidential for business reasons. But as Sales LJ pointed out, arrangements can always be made by the court if a litigant has legitimate business reasons for keeping something confidential. No application was made for the court to sit in private or to avoid referring in public to relevant financial amounts.[19]Mr Nolan may be right to say that CPR Part 1.3 does not require a respondent voluntarily to fill gaps in an applicant’s evidence in order to assist an applicant to discharge a burden of proof. But even if deliberate reticence on the part of a respondent is not a breach of CPR Part 1.3 a court can and should take account of deliberate reticence as part of the overall picture. Any evaluation has to be made on the totality of the evidence before the court; part of that totality is the absence of relevant evidence from the only party who is able to provide it. If, therefore, there were to be a practice of the Commercial Court (as to which we cannot express a view from our own experience) that security for costs will often be granted against a foreign company who is not obliged to publish accounts, has no discernible assets and declines to reveal anything about its financial position, our view is that the practice is a sound one and, as Lewison LJ noted, it is an important point of practice which should either be upheld or rejected at appellate level. We would uphold it.[20]There is some authority (to which the judge was not referred) in this court in relation to security for the costs of an appeal which is consistent with the practice. In Mbasogo v Logo Ltd [2006] EWCA Civ 608 Auld LJ pointed out that none of the respondent companies to the application before him “notwithstanding the history of this matter and much rattle of accoutrements before the battle over the issues of costs and the need for security” had sought to put forward any information as to their means. He said that the court’s approach to the question whether there was “reason to believe” that the relevant party will be unable to pay the other side’s costs fell below the level of balance of probabilities; he added “And where it arises as a result of the party against whom an order is sought either providing unsatisfactory financial information as to his or its affairs, or as in this case none at all, it is not a big step for the court to take to conclude that there is reason for such belief.”[21]As already indicated, we agree with that approach which also derives some support from the cases relied on by Auld LJ of Marine Blast Ltd v Targe Towing Ltd [2003] EWCA Civ 1940 and Phillips v Eversheds [2002] EWCA Civ 486. The respondents in those cases were English companies so information either should have been available or was available but was unsatisfactory. But the judges who decided those applications would, almost certainly, have come to the same conclusion if there was no obligation to publish financial records and a deliberate refusal to give the court any financial information.[22]We would therefore allow the first ground of appeal.

Are costs incurred in the Part 20 proceedings Addax’s costs?

[23]Both Mr Lewis and Mr Nolan dealt first with the costs incurred by Glencore which, if Sarpd were to lose, Addax would very probably be ordered to pay since Addax would itself have lost against Glencore. We shall deal with these costs first also.[24]Mr Lewis submitted that although these costs are currently Glencore’s costs and not Addax’s costs, once Addax are ordered to pay them they become Addax’s costs and are therefore within CPR Part 25.12 which entitled a defendant to apply “for security for his costs” (underlining supplied). An order for security for costs looks inevitably forward to the time when, at the end of the trial, a party is ordered to pay costs. If Sarpd loses, it is unlikely that Glencore would get an order for costs directly against Sarpd who had not sued it; it was much more likely that Addax would be held liable to pay Glencore’s costs. Addax’s costs would then include not merely its own costs of defending Sarpd’s claim but also its own costs in the Part 20 proceedings and the costs for which it was held liable in those proceedings against Glencore.[25]We consider this approach to be correct inasmuch as by the time the court makes its final order as to costs it will have determined (if Sarpd loses) that Glencore has won as against Addax. It would inevitably award costs to Glencore to be paid by Addax; it is highly likely that Addax will be entitled to recover those costs from Sarpd (as well as its own costs of defending itself against Sarpd and of suing Glencore). Those costs then become Addax’s own costs and thus costs for which, pursuant to CPR Part 25.12, it ought to obtain security if it can come within CPR Part 25.13.[26]All this is apparent from Johnson v Ribbins [1977] 1 WLR 1458 in which a legally aided mortgagor complained that her mortgagee had sold the mortgaged property at an undervalue; the mortgagee joined the estate agents through which she had sold the property. The claimant lost so both the mortgagee and the estate agents wanted their costs. Walton J thought it would be unfair if the defendant had to bear all the costs which would be irrecoverable from the legally aided claimant and so ordered the claimant to pay both sets of costs without any order for the defendant to be liable for any of the third party’s costs. This court said that was not right because the normal order was that the defendant should pay the third party’s costs if she lost against the third party; the fact of legal aid should make no difference. Goff LJ explained the nature of the normal order and said (page 1464A):- “Then if in the circumstances of the case these costs ought fairly to be borne by the plaintiff the court will further order that they be added to the defendants’ costs of the action as against the plaintiff.” It seems to us that, if it is right to talk of the costs being “added” to the defendant’s costs, it is right to say that they have become the defendant’s costs and are within Rule 25.12.[27]It was, moreover, held in Taly v Terra Nova Insurance Co. [1985] 1 WLR 1359 that a third party could not obtain security for costs directly against a claimant because only a defendant could do so. Although Mr Nolan relied on this authority as showing that third party proceedings are different from a claim, it seems to us that the logic of the decision is that, in a case where it is likely that a defendant will have to pay a third party’s costs if the claim fails, a defendant ought to be able to get security for those costs as well as his own costs as against the claimant in an appropriate case otherwise there is no way in which security for those costs can ever be obtained.[28]This was the approach of the court in Noterise Ltd v Haseltine Lake & Co. [1992] BCC 497 in which a dissatisfied intellectual property litigant sued both his patent agent and his solicitor. The solicitor brought contribution proceedings against the patent agent but the claimant then discontinued against the patent agent and said he should not be obliged to give security for the costs which the patent agent would be able to recover from the solicitor but only for the costs which the solicitor would incur in defending the action. Mummery J rejected that argument saying (pages 501-2):- “The court would also probably follow the normal rule in the exercise of its very wide discretion that the costs of the action which the plaintiff should pay to the successful second defendant should include the additional costs which the second defendant has been ordered to pay the first defendant on the contribution and indemnity proceedings: see Edginton v Clark & Anr [1964] 1 QB 367 at p. 385. In my view, those added costs which the second defendant, though successful in its defence, would be ordered to pay the first defendant, and which the successful second defendant is entitled to recover from the plaintiff, can properly be described as “defendant’s costs” within the meaning of sec. 726(1) of the Companies Act. They are costs that the second defendant is liable to pay if successful “in the defence” and the plaintiff can therefore be made liable to give security for those sums. This seems to me sensible because it is the claims of the plaintiff against the second defendant which have made the contribution and indemnity proceedings against the first defendant inevitable.”[29]What “seems sensible” to a judge of the Chancery Division should also seem sensible to a judge of the Commercial Court although, in fairness to Andrew Smith J, he was not referred to Noterise any more than he was referred to the decision of Auld LJ in Mbasogo. If moreover there were any doubt about the matter CPR Part 1.2 requires the doubt to be resolved in favour of doing justice in the particular case and in our view, justice does require that security be given in the absence of any evidence that the claim would be stifled.[30]We would accordingly reverse the judge’s decision about the costs for which Addax will be liable to Glencore but uphold his decision about Addax’s own costs of suing Glencore which are, of course, a fortiori to Glencore’s costs for which Addax will be liable. On any principled view the result should, in any event, be the same for both sets of costs. Subject to the last point, to which we now turn, we would therefore substitute for the judge’s order an order that security for costs should be given by the claimant in the sum which we understand has been agreed and we think is £868,254.42.

The relevance of the costs budgets

[31]Mr Nolan argues that the judge went wrong in indicating that if he had decided to order provision of security for Addax’s costs he would have done so by assessing the amount by reference to Addax’s costs budget dated 21 May 2015 approved by Blair J by an order in terms agreed between the parties dated 22 May 2015, thereby arriving at the sum of £380,000: [24]-[32]. Mr Nolan submits that on the application for security for costs the judge should have gone behind the costs budget approved by Blair J and examined for himself whether certain sums recorded in the costs budget as having already been incurred as at 21 May 2015 were reasonable and proportionate costs. In particular, Mr Nolan says that the sums recorded in respect of pleadings in the costs budget for Addax were too high.[32]Mr Lewis, on the other hand, whilst acknowledging that he would not seek to defend the entirety of the judge’s reasoning on this point, maintains that the judge was correct to use the costs budget as his reference point. He submits that we, like the judge, should assess the sum to be provided as security for costs by reference to Addax’s approved costs budget and should not permit the Respondent to go behind the figures in the costs budget which have already been approved by the court by the order made by Blair J. Similarly, we should assess Glencore’s likely recoverable costs by reference to its costs budget.[33]To understand the argument here it is necessary to say something about the way in which the costs budgeting regime operates. This is the regime introduced as part of the reforms introduced following recommendations made by Lord Justice Jackson. The regime is contained in the costs management provisions at CPR Part 3.12 to Part 3.18.[34]Part 3.12(2) states:
“The purpose of costs management is that the court should manage both the steps to be taken and the costs to be incurred by the parties to any proceedings so as to further the overriding objective.”
[35]The overriding objective is set out in CPR Part 1.1. It is that cases should be dealt with “justly and at proportionate cost”. As set out in Part 1.1(2) this includes, “so far as is practicable”, inter alia – “… (b) saving expense; (c) dealing with the case in ways which are proportionate –(i) to the amount of money involved;(ii) to the importance of the case;(iii) to the complexity of the issues; and(iv) to the financial position of each party; (d) ensuring that it is dealt with expeditiously and fairly; (e) allotting to it an appropriate share of the court’s resources, while taking into account the need to allot resources to other cases …”[36]Parties to litigation which is covered by the costs management regime, such as the present case, are required to provide each other and the court with costs budgets in good time before the first case management conference (CMC): CPR Part 3.13. The costs budgets are required to be set out in the format of the Precedent H template: para. 6 of Practice Direction 3E. Precedent H includes columns of figures for costs already incurred as at the date of the costs budget and columns of figures for the sums which it is estimated will have to be incurred in the future through to the end of trial.[37]Part 3.15 provides for the making of costs management orders, as follows: “(1) In addition to exercising its other powers, the court may manage the costs to be incurred by any party in any proceedings. (2) The court may at any time make a ‘costs management order’. Where costs budgets have been filed and exchanged the court will make a costs management order unless it is satisfied that the litigation can be conducted justly and at proportionate cost in accordance with the overriding objective without such an order being made. By a costs management order the court will-(a) record the extent to which the budgets are agreed between the parties;(b) in respect of budgets or parts of budgets which are not agreed, record the court’s approval after making appropriate revisions. (3) If a costs management order has been made, the court will thereafter control the parties’ budgets in respect of recoverable costs.” (a) record the extent to which the budgets are agreed between the parties; (b) in respect of budgets or parts of budgets which are not agreed, record the court’s approval after making appropriate revisions.[38]Part 3.17, headed “Court to have regard to budgets and to take account of costs”, provides as follows:
“(1) When making any case management decision, the court will have regard to any available budgets of the parties and will take into account the costs involved in each procedural step. (2) Paragraph (1) applies whether or not the court has made a costs management order.”
[39]Part 3.18, headed “Assessing costs on the standard basis where a costs management order has been made”, provides as follows:
“In any case where a costs management order has been made, when assessing costs on the standard basis, the court will – (a) have regard to the receiving party’s last approved or agreed budget for each phase of the proceedings; and (b) not depart from such approved or agreed budget unless satisfied that there is good reason to do so.” (a) have regard to the receiving party’s last approved or agreed budget for each phase of the proceedings; and (b) not depart from such approved or agreed budget unless satisfied that there is good reason to do so.”
[40]Paragraphs 7.3 and 7.4 of Practice Direction 3E state:
“7.3 If the budgets or parts of the budgets are agreed between all parties, the court will record the extent of such agreement. In so far as the budgets are not agreed, the court will review them and, after making any appropriate revisions, record its approval of those budgets. The court’s approval will relate only to the total figures for each phase of the proceedings, although in the course of its review the court may have regard to the constituent elements of each total figure. When reviewing budgets, the court will not undertake a detailed assessment in advance, but rather will consider whether the budgeted costs fall within the range of reasonable and proportionate costs. 7.4 As part of the costs management process the court may not approve costs incurred before the date of any budget. The court may, however, record its comments on those costs and will take those costs into account when considering the reasonableness and proportionality of all subsequent costs.”
[41]It may thus be seen that although a costs budget sets out the incurred costs element and the estimated costs element, as a result of para. 7.4 of PD3E the court does not formally approve the incurred costs element but only the estimated costs element; and it is only in relation to that approved estimated costs element that the specific rule of assessment in Part 3.18(b) applies, namely that the court will not depart from the approved budget “unless satisfied that there is good reason to do so”. It should be noted that there is no restriction in the Practice Direction regarding parties agreeing costs budgets as set out in the form of Precedent H, so in a case where the parties agree a costs budget in whole or in part and that is recorded in the relevant costs management order (as contemplated by Part 3.15(2)(a)), the rule in Part 3.18(b) applies both to the agreed incurred costs element and to the agreed estimated costs element.[42]However, even though in a case where court approval of a budget is in issue the approval does not apply to the incurred costs element (see the first sentence of para. 7.4 of PD3E), the court may still record its comments on those costs (in particular, regarding the court’s view whether they are reasonable and proportionate) as well as take them into account when considering the reasonableness and proportionality of items in the estimated costs element in the budget: see the second sentence of para. 7.4. If the court does record comments about the incurred costs, they will carry significant weight when the court comes to exercise its general discretion as to costs under CPR Part 44 at the end of trial.[43]For example, if a court has commented that incurred costs in a costs budget appear to be reasonable and proportionate, it would usually require good reason to be shown why such costs should not be included in an award of costs on the standard basis at the end of the trial. In such a case, the party who had put forward the costs budget would have been encouraged by the court to litigate on the understanding and with the legitimate expectation that such costs would be likely to be recovered if he were successful, and good reason would need to exist to justify defeating that expectation. Therefore, depending on what is said by the court by way of comment, the practical effect of a comment on already incurred costs made by a court pursuant to para. 7.4 of PD3E may be similar to the effect under Part 3.18(b) of formal approval of the estimated costs element in a cost budget.[44]Parties coming to the first CMC to debate their respective costs budgets therefore know that that is the appropriate occasion on which to contest the costs items in those budgets, both in relation to the incurred costs elements in their respective budgets and in relation to the estimated costs elements. The rubric at the foot of Precedent H also makes that clear, since it requires signed certification of the positive assertion that “This budget is a fair and accurate statement of incurred and estimated costs which it would be reasonable and proportionate for my client to incur in this litigation”.[45]It appears that this was indeed the understanding of each of Sarpd, Addax and Glencore in the lead up to the CMC in this case, as shown by the facts that each of them provided a costs budget which was signed and certified with this statement covering both the incurred costs element and the estimated costs element; they debated the entirety of their costs budgets with each other in advance of the CMC in the usual way; and they then agreed the terms of an order which they sent to Blair J to approve which included in respect of each costs budget a statement that the costs budget was approved in the full relevant total sum covering both the incurred costs element and the estimated costs element.[46]Taking Addax’s costs budget as an example, it set out figures for incurred costs amounting to about £90,000 and figures for estimated costs amounting to about £317,000, totalling together £407,906.85. The relevant order which all the parties together invited Blair J to make, and which he made without the need for a hearing, was this: “The Defendant’s costs budget is approved in the sum of GBP 407,906.85 in the form attached to this order” and Addax’s costs budget was attached to the order. The order made by Blair J included similar orders in relation to each of Sarpd’s and Glencore’s costs budgets.[47]Strictly, by reason of para. 7.4 of PD3E the court could not approve the incurred costs element of these costs budgets in a way which would engage the effect of CPR Part 3.18(b). The proper interpretation of the order made in relation to each costs budget, therefore, is that the estimated costs element in each case was approved by the order (so that Part 3.18(b) was engaged in relation to that element) and the court commented on the incurred costs element in each case (and on the total figure which included that element), as it was entitled to do under the second sentence of para. 7.4, to the effect that it agreed the claim made on the face of the costs budget that those costs were reasonable and proportionate costs in the litigation. The effect of this comment was that it was likely that the incurred costs element would be included in any standard assessment of costs at the end of the day, unless good reason was shown why it should not be. There was little if any difference between the practical effect of the court’s order in relation to incurred costs and its order in relation to estimated costs.[48]There was also little if any difference in practical effect between what happened here and the position which would have arisen if, instead of recording its own approval, the court had recorded that the respective costs budgets had been agreed in full by the parties; which in substance, of course, they had been, since the parties invited Blair J to make his order in terms which they had all agreed.[49]Against this background, we consider that the judge was clearly correct to take the approved costs budget of Addax as the appropriate reference point from which to work out the amount of Addax’s own costs which should be provided by way of security and that is what we should do. Similarly, in relation to assessing the costs likely to be recovered by Glencore and then passed on to Addax and recovered by it from Sarpd, it is appropriate to use Glencore’s costs budget as the relevant reference point.[50]There are two reasons for this. First, all the parties appreciated, or should have appreciated, that the first CMC was the appropriate occasion on which issues between them regarding the quantum of costs shown in their respective costs budgets should be debated. That was so both in relation to the estimated costs elements in the budgets, in respect of which a costs management order might be made under CPR Part 3.15(2)(b) and pursuant to para. 7.4 of PD3E to record the court’s approval of those elements, and in relation to the incurred costs elements in the budgets, in respect of which it would be open to the court to make comments under para. 7.4 of PD3E. Moreover, CPR Part 3.17 makes it clear that costs budgets are to be important instruments for all case management decisions, so parties must appreciate that if they wish to take issue with another’s costs budget they should do so at the first CMC, when there is to be debate about the costs budgets. In this case the first CMC, and the process leading up to it, afforded each party a fair opportunity to make any submissions they might wish on each other’s costs budgets.[51]Sarpd chose not to dispute the reasonableness and proportionality of the sums set out in Addax’s and Glencore’s costs budgets when it had the opportunity to do so. There has been no relevant change of circumstances between the date of the CMC when Blair J made his order and the time for consideration of Addax’s application for security for costs. On this application it would be contrary to the overriding objective to allow Sarpd to try to re-open costs issues which it had already had a fair opportunity to address. It would not be just to permit it to do that and it would add disproportionate cost in dealing with the case if a court had to go behind the settled costs budgets in a case like this. To allow such a course would add unnecessarily to expense, rather than save it (see CPR Part 1.1(2)(b)); would be likely to add to the time and effort required to argue and determine a security for costs application and so would contravene the requirement to ensure that cases are dealt with expeditiously and fairly (see Part 1.1(2)(d)); and would also involve allocating an inappropriate share of the court’s resources in having to re-visit an issue already dealt with by the court (see Part 1.1(2)(e)). When we pressed Mr Nolan as to how the course he proposed could be regarded as compatible with the overriding objective he had no good answer.[52]Secondly, for reasons explained above, Addax’s costs budget and Glencore’s costs budget, as “approved” in and appended to Blair J’s order, will be a strong guide as to the likely costs order to be made after trial, if Addax is successful, both in relation to the incurred costs elements and in relation to the estimated costs elements. It is therefore appropriate that the costs budgets as so “approved” should be used as the relevant reference points for considering the amount which should be ordered for security for costs.[53]On the footing that the costs budgets (including both the incurred costs and the estimated costs elements) are to be used as the relevant reference points then, after making certain allowances accepted by Mr Lewis, as mentioned above we understand it is agreed that the total amount to be ordered to be provided by way of security for costs is £868,254.42.

Cited in 32 later judgments

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